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Step-By-Step Guide To Incorporating A Private Company

LCI Thought Leader Rajesh Tandon
25 September 2023  
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Key Takeaways

  • What is incorporation of a private limited company?
  • Steps of incorporation of a company
  • Case laws
  • Important provisions
  • FAQ's

Introduction

In India, forming a private limited company (PLC) is a common technique to launch a business. Incorporating a private company is an exciting step towards turning your business idea into a legal entity. This process provides several advantages, such as limited liability, access to funding, and a structured framework for business operations. According to the 2013 Companies Act, it is registered with the Ministry of Corporate Affairs (MCA). In many jurisdictions, a private firm is also known as a private limited company. The key features of a private firm include:

  • Limited Liability: One of the primary advantages of a private firm is that the liability of its shareholders (owners) is limited to the extent of their unpaid shares. In other words, the personal assets of the shareholders are protected from the company's debts and liabilities. This means that if the company faces financial difficulties or legal issues, the shareholders are generally not personally responsible for covering the company's obligations beyond the value of their shares. Section 2(68) of the Companies Act, 2013, defines a private company, emphasizing the limited liability feature.
  • Separate Legal Entity: A private firm is considered a separate legal entity from its owners (shareholders). This legal concept means that the company has its own rights, responsibilities, and obligations. It can enter into contracts, own property, sue or be sued in its own name, and engage in various business activities independently of its shareholders. Section 2(20) of the Companies Act, 2013, recognizes companies as separate legal entities.
  • Ownership and Management: Ownership in a private firm is typically determined by the number of shares held by each shareholder. Shareholders have the authority to appoint and remove directors who manage the day-to-day operations of the company. The shareholders elect directors who make strategic decisions and oversee the company's affairs.
  • Restrictions on Share Transfer: Private firms often impose restrictions on the transfer of shares to maintain control within a closed group of shareholders.
  • Limited Number of Shareholders: In many jurisdictions, private firms are required to have a limited number of shareholders. This limitation is intended to maintain the privacy and control of the company.
  • Less Stringent Regulatory Requirements: Private firms typically have fewer regulatory and reporting requirements compared to publicly traded companies. They are not required to publicly disclose their financial statements and other business information to the same extent as public companies.
  • Ease of Ownership Transfer: While share transfer in private firms may be restricted, it is generally easier to transfer ownership in comparison to other forms of business entities, such as partnerships or sole proprietorships. The transfer process typically involves the sale or transfer of shares to another party.

A general step-by-step process of incorporating a private company is as follows

Determine the Company's Name and Structure

Before you can start the incorporation process, you need to decide on your company's name and structure. Ensure that the chosen name is unique and does not infringe on any existing trademarks. Additionally, choose between a sole proprietorship, partnership, limited liability partnership (LLP), or a private limited company, depending on your business goals and needs. In the case of Registrar of Companies v. Delhi Cloth and General Mills Co. Ltd. (AIR 1925 All 246), the court emphasized the importance of distinct names for companies to avoid confusion among stakeholders.

Appoint Directors and Shareholders

Incorporation typically requires appointing at least one director and shareholder. The directors are responsible for the company's management, while shareholders are the owners. In many cases, the director and shareholder can be the same person.

Registered Office Address

You must provide a registered office address for your company. This is where official correspondence will be sent, and it must be a physical address within the jurisdiction where you are incorporating the company.

Create Memorandum and Articles of Association

Memorandum of Association outlines the company's objectives and powers, while Articles of Association define the internal rules and regulations governing the company. In some jurisdictions, you may use standard templates for these documents, while in others, you may need to draft them from scratch. In the landmark case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875) LR 7 HL 653, it was established that the MOA and AOA are the company's constitution and bind both the company and its members. Section 4(3) of the Companies Act, 2013, prescribes the contents of MOA and AOA.

Obtain Director Identification Number (DIN) and Digital Signature Certificate (DSC)

Directors must obtain a DIN, which is a unique identification number, and a DSC for signing electronic documents. This can often be done online through the relevant government authority or agency.

Check Name Availability

Before proceeding with incorporation, you need to check if your chosen company name is available. Most government websites provide an online name availability search tool. If the name is available, you can reserve it for a certain period.

File Incorporation Documents

Prepare and file the necessary incorporation documents with the relevant government authority. These documents typically include the Memorandum and Articles of Association, declaration by directors, and details of shareholders and directors. In the case of Salomon v. Salomon & Co. Ltd. (1897) AC 22, the House of Lords upheld the separate legal entity principle, emphasizing the importance of proper registration. Section 7 of the Companies Act, 2013, mandates the filing of incorporation documents with the ROC.

You'll also need to pay the required incorporation fees.  Section 7 of the Companies Act, 2013, and relevant rules stipulate the registration fees.

Obtain Certificate of Incorporation

Once your application is processed and approved, you will receive a Certificate of Incorporation. This document serves as proof that your company is legally registered and recognized by the government. In the case of R.D. Seth & Co. Pvt. Ltd. v. R.D. Seth & Ors. (2013) 177 Comp Cas 33 (Del), the court upheld the significance of the Certificate of Incorporation.

Apply for Permanent Account Number (PAN) and Tax Registration

After incorporation, you should apply for a PAN for your company. This is necessary for taxation purposes. Depending on your jurisdiction, you may also need to register for other taxes like Goods and Services Tax (GST) or Value Added Tax (VAT).

Compliance and Reporting

Ensure that you comply with all ongoing regulatory requirements, such as filing annual financial statements and conducting regular board meetings. Failure to meet these obligations can result in penalties or even the dissolution of the company. Various sections of the Companies Act, 2013, and other relevant laws prescribe statutory compliance requirements. In Union of India v. M/S Surya Processors (2018) SCC OnLine SC 1580, the Supreme Court emphasized the importance of statutory compliance.

Conclusion

Incorporating a private company is a significant step towards establishing a formal, legal business entity. While the specific procedures and requirements may vary from one jurisdiction to another, this general guide provides an overview of the key steps involved. It's crucial to consult with legal and financial professionals or the relevant government authorities in your area to ensure that you meet all the necessary requirements and regulations during the incorporation process. With careful planning and execution, your private company can enjoy the benefits of limited liability and pave the way for business growth and success.

FREQUENTLY ASKED QUESTIONS

1. What is a private firm, and how does it differ from a public company?

A private firm is a business entity with limited liability, owned by a group of shareholders, and its shares are not publicly traded. It differs from a public company, which can offer shares to the public through stock exchanges and has more extensive regulatory requirements.

2. What are the basic steps involved in incorporating a private firm?

The basic steps typically include selecting a unique company name, drafting the Memorandum of Association (MOA) and Articles of Association (AOA), stamping and signing these documents, filing them with the Registrar of Companies (ROC), paying registration fees, and obtaining the Certificate of Incorporation.

3. How do I choose a suitable name for my private firm?

The name should be unique, not infringe on trademarks or copyrights, and comply with the naming rules and regulations of your jurisdiction. It's advisable to check the availability of the chosen name with the ROC.

4. What fees are involved in the incorporation process?

Fees include registration fees paid to the ROC, stamp duty on documents, and any professional fees if you hire a consultant or lawyer to assist with the process.

5. How long does it take to obtain the Certificate of Incorporation?

The processing time varies by jurisdiction, but it typically takes a few weeks to receive the Certificate of Incorporation once all documents and fees are submitted and verified.


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